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McCormick Earnings: Sales and Profit Gains Sprout Up Despite Competitive and Macro Challenges

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McCormick & Co Inc Registered Shs Non Vtg

We don’t foresee a material change to our $63 fair value estimate after McCormick MKC cooked up 6% organic sales growth and 150 basis points of adjusted gross margin expansion to 37% in its fiscal third quarter. However, the market soured on shares, sending the stock down at a high-single-digit percentage clip on the print (which we attribute to softness in China and an unchanged operating income outlook, despite the uptick in gross margins). As such, the stock trades just a touch above our intrinsic valuation; we think investors should keep an eye on this wide-moat name, which rarely trades at a discount to our valuation (not seen since 2017).

Even as raging supply chain disruptions have largely been put to rest, competitive pressures persist amid a weakening consumer spending backdrop. Further, inflationary angst has yet to subside, with management calling for a low- to midteens uptick this year. Despite these pressures, we surmise McCormick is judiciously pursuing multiple avenues to ensure its competitive edge holds. For one, while the firm has raised prices to offset a portion of the stepped-up costs it is seeing, McCormick continues to direct resources to bring consumer-valued innovation to market and to tout its fare. In this context, we forecast McCormick will expend around 5% of sales, $400 million annually, on research, development, and marketing to support its brand standing with consumers, retailers, restaurateurs, and packaged food manufacturers. We posit these investments are even more crucial at present, given McCormick is in the midst of the all-important holiday season (September through November, when consumers historically favor branded spices and seasonings in the preparation of holiday meals); this period tends to account for close to 30% of its annual sales. Beyond this, we see the strategic prudence in efforts to extract inefficiencies from its operations while discontinuing the production of some lower-margin offerings.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Erin Lash

Sector Director
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Erin Lash, CFA, is director of consumer sector equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. In addition to leading the sector team, Lash covers packaged food and household and personal care companies.

Before joining Morningstar in 2006, she spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance.

Lash holds a bachelor’s degree in finance from Bradley University and a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. She also holds the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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